European Economic and Social Committee (EESC) Plenary MeetingBrussels,
15 February 2006

Introduction

Ladies and Gentlemen,

It is a great pleasure for me to be here at this Plenary Meeting of the
European Economic and Social Committee. The EESC is a much appreciated source of
advice for the Commission’s activities. Your opinions, as a result of
either formal consultation or your own initiative, are an excellent way for us
to hear, and to listen to, the views of organised civil society.

Already on many occasions your Committee has given advice on issues related
to economic policy coordination. And on your agenda today you again have two
own-initiative opinions in this area. We obviously share the view that good
economic governance is a matter of great importance for the European Union! So I
am very pleased to share with you my thoughts on this issue.

There is also a third opinion on your agenda, which deals with the creation
of a common consolidated corporate tax base in the European Union. I will touch
upon this as well but will not go into great depth since it is clearly a matter
for my colleague Commissioner Kovács.

Good economic governance – in so far as it fosters macroeconomic
stability and structural reform – is conducive to a better macroeconomic
performance. So I will comment on the progress we are making in these areas.

There are three issues I would like to focus on today:

First, I will sketch the substantial progress made in Europe in the area of
macroeconomic stability. The single monetary and exchange-rate
policy in the euro-area countries and the Stability and Growth Pact have been
crucial here.

Second, I will turn to structural reform. I will talk aboutthe major economic challenges that Europe is facing in this area and I will
explain how we try to address these in the Lisbon Agenda and through the
Integrated Guidelines.

Thirdly, as I have mentioned, I will say a few words on the issue of a
common consolidated corporate tax base in the European Union.

I will conclude with a few words about the cooperation between the
Commission and the EESC.

1. Macroeconomic stability

One of the main achievements of the Economic and Monetary Union (EMU) has
been the creation of macroeconomic stability in Europe. The
“stagflation” of the 1970s and early 1980s was a salutary experience
for Europe. An inappropriate monetary and fiscal policy response to the two
major oil price shocks resulted in output stagnating and prices soaring. This
was surely a costly demonstration of the consequences of a weak macroeconomic
policy framework.

EMU has delivered low and stable inflation rates. Consumer price inflation
has come down from rates around 7 per cent in the 1980s and above 4 per cent in
the early 1990s to around 2 per cent today. However, headline inflation has been
a little above the 2 percent ceiling for some time now. This partly reflects the
impact of higher oil prices.

Securing low inflation is the best contribution that monetary policy can make
to sustainable growth over the longer term.

Firstly, because low inflation makes it easier to observe changes in relative
prices. This allows households and firms to make better informed consumption and
investment decisions, which promotes efficiency. Secondly, investors will be
less likely to demand an “inflation risk premium” to compensate for
holding riskier assets. In other words, low inflation improves the efficiency of
capital markets, which also fosters economic growth. Thirdly, price stability
reduces the need for households and firms to divert scarce resources from
productive uses in order to hedge against inflation. Again, this promotes
efficiency and thus long-run growth.

In addition, EMU has eliminated exchange rate risk within the euro area. This
has improved price transparency, eliminated “exchange risk premia”,
stimulated financial market integration and made intra-euro area transactions
cheaper. These factors should all contribute to higher growth in the euro area.

Fiscal discipline has also helped to underpin macroeconomic stability in EMU.
The reduction of budget deficits since the early 1990s has helped to create more
favourable conditions for investment and boost confidence. In the short run,
sound fiscal positions have allowed the automatic stabilisers to operate
relatively freely in response to economic downturns. In the medium and long run,
the Pact promotes sustainable public finances and favours a reallocation of
public resources in line with government priorities. It provides an appropriate
framework for prudent budgetary management that is conducive to growth. It is
thus in the economic self-interest of all countries.

While the experience with the Pact has been positive overall, its application
during the first years of EMU revealed some shortcomings and hence the need for
reform, and a revamped SGP was agreed to in March 2005. The Opinion prepared by
Ms Florio and Mr Burani of this Committee on the reform of the Stability and
Growth Pact (SGP) is rather critical. I would like to respond to it by
presenting my views on the SGP reform and arguing that the revised Pact is in
fact working well in practice.

The reform strengthens the economic rationale of the rules. Let me give three
concrete examples:

One, in the revised SGP, the focus is no longer just on nominal results but
also fiscal efforts. Deadlines for correcting excessive deficits will now take
into account cyclical conditions, debt sustainability and the specific situation
of individual countries. Excessive deficits will have to be corrected by
implementing structural measures.

Two, the reform includes new incentives for Member States to strengthen
their consolidation efforts in economic good times. This will help prevent
excessive deficits from arising in the first place.

I strongly believe that full implementation of the
revised SGP will bring better results than partial implementation of the
original Pact. This is not just wishful thinking. There are very convincing
arguments that a rules-based framework that has a sound economic basis and
allows room for judgement will lead to better outcomes. Let me just stress three
key elements.

The new provisions will improve the quality of decisions and recommendations
made under the SGP. And the more economically sound decisions and
recommendations are, the more difficult it will be to oppose them.

Yes, there is greater room for judgement: but a number of straightforward
provisions prevent it from being abused. Any deficit above 3% that is either not
close to the reference value or not temporary will be considered excessive.
Excessive deficits will need to be corrected promptly and permanently.

Finally, the reform clarified the role and responsibilities of the
Commission, the Council and the Member States in ensuring sound fiscal policies
in Europe. Let me say that I do not agree with those who say that the role of
the Commission has been weakened by the reform. Since any EDP action must be
based on a Commission recommendation, the fact that the framework now relies
more on both case-by-case judgement and a more nuanced matrix of economic
criteria increases rather than diminishes the importance of Commission
assessments.

Finally, I would like to point out that our initial
experiences with the revised Pact have been encouraging and suggest a renewed
sense of national ownership of the framework. In the cases of Italy and
Portugal, the revision of the Pact allowed deadlines for the correction of
excessive deficits to be set that were realistic about the appropriate speed of
adjustment. The case of the UK also confirmed that the new Pact is being
implemented as it should be.

Overall, I believe that the SGP reform struck the right balance between the
economic rationale and simplicity, between allowing more room for judgement and
maintaining the rigour of the rules-based system. If we Full implementation of
its provisions would go a long way towards addressing the main challenges
currently faced by fiscal policy in the EU.

It is clear, then, that EMU has greatly contributed to macroeconomic
stability through low inflation, the euro and fiscal consolidation.
Nevertheless, I see scope for further progress towards macroeconomic stability
in Europe, not only among the new Member States, which are understandably still
in the convergence process, but also among the older ones.

Now I would like to turn to the medium- and long-term challenges Europe is
facing, and in particular the need for structural reform.

2. Structural reform: main challenges and the renewed Lisbon
Strategy

The most pressing challenges that Europe currently faces are the lack of
growth and new jobs, the growing competitive pressures from an integrating world
economy, and the consequences of the ageing of the population. The way we tackle
these fundamental challenges will be crucial for the future prosperity of the
Union and the well-being of its citizens.

After a prolonged slowdown, there are early signs that the EU’s
economic outlook is improving. Despite this good news, the EU economy still
lacks resilience in the face of shocks. Potential growth remains low at around
2%. Europe’s labour force is still grossly underutilised as witnessed by
low employment rates as well as high and persistent unemployment.

Moreover, demographic projections are quite unfavourable for Europe. This
will put strains on the sustainability of public finances in many EU countries.
According to the EPC and Commission report endorsed yesterday by the ECOFIN
Council, the EU’s old-age dependency ratio is projected to double in the
next half-century so that Europe will go from having four people of working-age
for every elderly citizen to only two. This means that the effect of population
ageing alone might reduce the rate of potential growth by nearly half between
2031 and 2050, to 1.3%. This, as you can imagine, will put the sustainability of
the European social model under pressure. Expenditure on pensions and health
care is on the increase while the reduction of labour supply will jeopardise our
ability to maintain high economic growth.

Finally, the European economy is part of an increasingly integrated world
economy. The challenge is to make globalisation work to the EU’s
advantage. And we can. We must use it to make the EU more competitive. A recent
report by the Commission shows that the present phase of globalisation could
bring substantial income gains over the next half century – but only if we
fully exploit the opportunities. However, it will also require considerable
short- to medium-run economic adjustment in some sectors of the European
economy.

How can we meet the challenges I have just described? First, we need to step
up our potential growth, by becoming more productive and increasing employment.
And second, we must make the EU a global and dynamic economy, more resilient and
adaptable. This would enable us to move to growth sectors and processes and to
embrace new markets while cushioning the internal social and economic
adjustment.

To do this we need to put in place a comprehensive set of EU-wide structural
reforms in product, labour and capital markets. We need more investment to
increase our human, physical and knowledge capital, and we need to reorganise
our economy. And these structural reforms need to be underpinned by appropriate
growth- and stability-oriented macroeconomic policies.

The 2005 Spring European Council recognised the urgency of action to
strengthen Europe’s competitiveness and boost its growth potential, and
re-launched the Lisbon strategy with a stronger focus on raising growth and
employment. Policy advice on how precisely to achieve this is provided by the
Integrated Guidelines package, which includes the EU’s main policy
coordination instruments, the Broad Economic Policy Guidelines and the
Employment Guidelines. The governance of the strategy has been modified to take
the form of a partnership between the Community and the Member States. This has
resulted in a clearer and more streamlined distribution of tasks and
responsibilities.

As a first step, Member States submitted their National Reform Programmes in
the autumn of 2005. These Programmes set out the Member States’ own reform
strategies, which follow the general directions given by the Integrated
Guidelines but are tailored to their individual needs. The Annual Progress
Report published by the Commission at the end of January assesses the National
Reform Programmes and the progress of the re-launched strategy, and shows that
the EU is on the right track. Nevertheless, the path ahead remains long and
demanding. The report also identifies four areas for urgent action: knowledge
and innovation; business potential; globalisation and ageing; and energy policy.
Measures in these areas should be implemented by 2007 and complement the
medium-term priorities specified in the Integrated Guidelines.

As I’ve mentioned, an important element of these Integrated Guidelines
are the Broad Economic Policy Guidelines – the BEPGs. They are the
Union’s key economic policy instrument for advancing the Lisbon agenda. I
am therefore glad to note that this Plenary is also discussing the BEPGs and I
share the assessment in your draft opinion prepared by Mr. Metzler. Sound and
sustainable macroeconomic policies and broad-based structural reforms are
essential for confidence, growth and raising potential output. The standard of
living we enjoy in the future will depend on progress in building the knowledge
economy. As you rightly stress, this will require sustained efforts to improve
education, training and research – the building blocks of a highly
innovative economy.

3. Common Consolidated Corporate Tax Base

Turning to the forthcoming opinion of rapporteur Mr. Nyberg on the creation
of a common consolidated corporate tax base in the European Union, I cannot
emphasise strongly enough just how important such a common tax base is for
companies doing business Europe-wide.

Contrary to what some may think or would like us to think, this debate is
not about stopping tax competition or about violating Member
States’ rights to decide on tax rates. The debate is really about removing
important tax obstacles to the Single Market in order to unleash the full
employment and growth potential of the European economy. Studies show that
companies with subsidiaries in another Member State have higher tax compliance
costs than companies with only domestic subsidiaries. Studies also show that
harmonising tax bases would bring GDP and welfare gains.

I am sure the European Economic and Social Committee will agree with me that
a common tax base should ideally meet the following four criteria.

First, it should contain a single set of tax rules. It should also allow for
cross-border loss relief via consolidation, so that taxable profit would no
longer be allocated on the basis of transfer prices but by commonly agreed
allocation formulae.

Second, it should - as far as possible - incorporate the International
Financial Reporting Standards that are now required for quoted European
companies in their consolidated accounts. Obviously, not all provisions of these
standards are perfectly suitable for taxation purposes. However, they are a
useful starting point that tax and accounting experts should consider.

It is also essential that a common consolidated tax base provide all
companies with a viable and attractive tax system. This is particularly
important for Societas Europeae, which cannot develop without an adequate
tax scheme.

Finally, we should seize this unique opportunity to set up a tax base that
has desirable economic properties, even if this means departing somewhat from
traditional corporate tax systems. A good tax base would be simple, enforceable,
broad and stable, and would have low compliance costs. In addition, it should
make tax collection efficient and tax evasion difficult, aim for neutrality
across investors and treat the various categories of taxpayer
fairly.

I am very pleased that the 25 Member States have chosen to
collaborate with the European Commission on the common consolidated corporate
tax base project. I hope that this Committee will support the initiative. But I
am confident that goodwill and common sense will enable us to rapidly find a
viable solution.

4. Summary and reflections on future enhanced cooperation between
Commission and EESC

To recap the main points of my argument today:

First, I argued that within Europe much progress has been made in the area
of macroeconomic stability. I argued that the reform of the Stability and Growth
Pact has increased the economic rationale of the rules and that its
implementation so far has been encouraging. I also explained why I do not agree
with your report’s assertion that the Commission’s role has been
weakened by the reform.

I then set out my views on the main economic challenges that Europe now
faces. I indicated that there is a widespread consensus that urgent action is
required in 4 areas: knowledge and innovation; business potential; globalisation
and ageing; and energy policy. We discussed the role of the renewed Lisbon
Agenda and the BEPGs in this process.

Finally, I argued that I consider a sound, common, consolidated corporate
tax base to be essential for Europe’s single market.

I would
like to conclude my presentation with some reflections on the future cooperation
between the Commission and the EESC. As I already mentioned, the EESC has made a
significant contribution to the review of issues related to economic governance
in the EU and the euro area. The two opinions on the agenda of the February
Plenary are the results of fruitful discussions in the EESC’s study groups
and in the Section on EMU and Economic and Social Cohesion. DG ECFIN has very
actively participated in the preparatory work, giving its position on the
assessment and recommendations made in the draft opinions, while the debates
organised by the EESC with Mr Jean Pisani-Ferry and Mrs Berès have also
provided useful background.

However, even closer inter-institutional relations and improved cooperation
would be welcome. This would enable us to better exploit the potential synergies
between our organisations. A new framework agreement was signed to this end on 7
November 2005, advocating a more active role for the EESC in the preparation of
Community action and closer cooperation with the Commission. The first step in
this will be to choose issues of common strategic interest, and then decide how
to coordinate our work on those issues to achieve the best result. Personally, I
would be more than happy to discuss issues of common interest with you in this
Plenary on a more regular basis. So thank you once again for inviting me today.